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Christine Lagarde, the managing director of the IMF, is showing her bold approach once again. Reports are emerging that the IMF threatens to deny further aid to Greece unless a 50% haircut is agreed with the private sector.  

IMF programs usually consist of restructuring of debt among other measures. In Greece’s case, the opposition of France and the ECB to restructuring / haircut / default complicated the situation.

The European Union decided to approve the next tranche of aid to Greece based on the troika report. The IMF hasn’t given its approval yet. This seemed like a delay, but the bold stance of Lagarde at the meeting of finance ministers shows that things are more serious.

A small comment regarding the IMF stand appears deep inside a report by the Telegraph:

The IMF would no longer be willing to pick up a third of the total bill for rescuing Greece, a contribution worth €73 billion, unless European banks were prepared to write off 50 per cent of Greek debt.

Lagarde found herself on a collision course with her successor at the French finance ministry over this issue and closer to the German approach.  Regarding bank recapitalization and the role of the ECB, Lagarde’s stand is not necessarily similar to the German one. The IMF wants a wider recapitalization of banks than the €100 billion that is coming out of the current meetings.

The IMF contributes a third of the Greek aid. With the IMF not playing along, things are more complicated. The EU could provide Greece with the immediate lifeline without the IMF’s participation, but this would still make a lot of damage:

  • A blow to investor confidence: Without endorsement from the IMF which has been active up to now, no solution will be comprehensive.
  • More pressure on the EFSF: If Europe carries the burden also for the IMF, cash will run out faster.

In the analysis of the EU Summit, I wrote that the compromise that will be reached will probably fall short of expectations: a temporary celebration that will lead to a downfall, exactly likely the July 21 Summit.

Currently things are set to begin with a downfall which may hurt the euro quite soon.  For more on the euro, see the EUR/USD forecast.

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